The Consumer Protection Act – Part III: The CPA and Franchising
This is the third article in our three-part series on the Consumer Protection Act. Also read ‘Part I: The CPA and the Business Owner’ and ‘Part II: Consumer Rights and Responsibilities’.
The Consumer Protection Act No. 68 of 2008 – legislation which sets out to promote a fair, accessible and sustainable marketplace for consumer products and services – will have considerable impact on the franchising industry in South Africa. How and why will your franchise business be affected by the Act?
For the first time, this legislation brings South Africa into line with other countries where franchising is strictly regulated. Says Ian Jacobsberg, franchise attorney and partner at law firm Eversheds, the Consumer Protection Act represents the first attempt in South Africa to regulate franchising by specific regulation. “For years, countries like Australia, Canada and the USA have had franchise-specific legislation on their statute books. But in South Africa, until now, franchise agreements have largely been regulated purely by the terms of the agreement between franchisor and franchisee. This has allowed a number of unscrupulous franchisors to take advantage of aspiring entrepreneurs and sell ‘franchises’ which are little more than pyramid schemes.”
‘Unproven franchise concepts’ is cited as one of the top three reasons why franchise businesses fail in their first three years of operation. The Department of Trade and Industry believes that the Consumer Protection Act will raise standards of quality and improve levels of competition in the marketplace – ultimately protecting the consumer (or franchisee, for under the new legislation a franchisee is regarded as a consumer). Knowing what s/he is getting into is crucial when a prospective franchisee considers purchasing a franchise. Says Jacobsberg, the Consumer Protection Act, and particularly the regulations which are enacted in terms of it, will require franchisors to be far more transparent, both before and after the conclusion of an agreement: ‘This must have the effect of weeding out unscrupulous and opaque operations’.
What is a franchise agreement?
Until now, a clear definition of a franchise agreement has not existed. “South African law has never previously defined what a franchise agreement is,’ explains Jacobsberg. ‘If the parties to an agreement called it a franchise agreement, it was accepted as such. This meant that a wide variety of arrangements, from loose agency and distributorship relationships to tightly regulated business format franchises, could be termed franchise agreements. The Consumer Protection Act introduces the first clear definition of franchise agreements in South African law.”
Here’s how the Consumer Protection Act sets it out:
“‘franchise agreement’ means an agreement between two parties, being the franchisor and franchisee, respectively— (a) in which, for consideration paid, or to be paid, by the franchisee to the franchisor, the franchisor grants the franchisee the right to carry on business within all or a specific part of the Republic under a system or marketing plan substantially determined or controlled by the franchisor or an associate of the franchisor; (b) under which the operation of the business of the franchisee will be substantially or materially associated with advertising schemes or programmes or one or more trade marks, commercial symbols or logos or any similar marketing, branding, labelling or devices, or any combination of such schemes, programmes or devices, that are conducted, owned, used or licensed by the franchisor or an associate of the franchisor; and (c) that governs the business relationship between the franchisor and the franchisee, including the relationship between them with respect to the goods or services to be supplied to the franchisee by or at the direction of the franchisor or an associate of the franchisor.”
Franchisor versus Franchisee
Far from being simply a piece of legislation, the Consumer Protection Act will have very real practical implications for franchisors and franchisees alike. “For franchisors, the Consumer Protection Act means that they will have to ensure that their franchise agreements contain certain information and terms that were never previously compulsory,” says Jacobsberg. “They will also be obliged to give prospective franchisees a franchise disclosure document, before the agreement is signed, to enable them to evaluate the business opportunity. A franchisee will be given a ‘cooling-off period’, after signing an agreement, within which he will be able to change his mind and pull out of the agreement. In addition, the Act will restrict the ability of a franchisor to insist on franchisees purchasing supplies from the franchisor, unless the products concerned are related to the franchisor’s intellectual property or there is an economic advantage to the franchisee.”
Will existing franchise agreements be allowed to run their course? Yes, says Jacobsberg, but he cautions that, according to the draft regulations which have been published in terms of the Consumer Protection Act, if an existing agreement doesn’t comply with the requirements of the Act and its regulations, it will have to be amended to bring it into line with the requirements by September 2011.
To ensure that your franchise business is compliant with the Consumer Protection Act, Jacobsberg recommends the following:
- Franchisors should carry out an audit of their franchise agreements, disclosure documents and other business documentation
- Any required amendments should be made before the stipulated deadlines (See: What if I don’t comply?)
- Franchisors should note that franchisees are suppliers of products and services in their own right and are also affected by the Consumer Protection Act in their dealings with customers – if franchisees don’t comply with the Act, the franchisor’s brand could be negatively affected
- Given the complexity of the Act, and especially the regulations, and the numerous respects in which they affect businesses, advice should be obtained from professionals with specialist knowledge of franchising.